0.4 Income distribution  (Page 13/18)

Whatever older views might have been, income inequality is not a problem that can be ignored anywhere. Here is the good news. Many nations that have achieved some degree of income redistribution both through the tax side and the expenditure side of the federal budget. But like the Nordic nations since about 1980, they have increasingly achieved this by relying not on the tax side but the expenditure side of the budget, by channeling government spending into growth facilitating human capital formation as programs of direct budget transfers to poorer households. These lessons were widely learned; notably, from 1984 through 2000, nearly 50 nations, from Indonesia, Ghana, Mexico, Estonia, Lithonia to Poland enacted tax reforms involving much simplified, more enforceable taxes imposed at lower , flatter rates, thereby enhancing their capacity for meeting the needs of poorer groups through programs of effective government spending. As one result, by 2013 all nations had lower corporate tax rates than the U.S., where a 35% rate is virtually double the world average.

Rarely mentioned in discussions about inequality in the U.S. is the very large and increasing share of federal taxes paid by the wealthy. In 1979, the top 1% of the income distribution paid but 18% of total income taxes. By 2003, the share paid by the top 1% had climbed to nearly 35%. And, by 2010, according to the Tax Foundation the top 1% earned 19% of gross national income, and paid 38% of all federal taxes. And, by 2013, according to the Economist (September 20, 2014) this group paid 46% of total taxes but largely because of the U.S. Earned Income Tax Credit (EITC), which results in millions of families receiving checks from the Internal Revenue Service, instead of paying income taxes. The top 10% receives 45% of national income and pays 59% of taxes. The bottom 50% pays just 3% of taxes, while 40% of U.S. households pay no income taxes at all, partly because of their income tax exemptions.

Increasingly in tax reform, developing and developed countries have turned to one particular type of low-rate, simplified indirect tax as we will see in Chapter ___. This tax is the value added tax (VAT) a superior type of tax both in raising revenues and avoiding adverse economic effect. Since 1965, nearly 160 nations including Denmark, Sweden, Chile and nearly 20 African nations have adopted this highly feasible tax, including 21 in Sub-Saharan Africa and over a dozen in Latin America.

An overlooked lesson on redistribution and taxes

It is important to understand that countries can impose high rates of personal income tax and still prosper, if they can collect high rates of tax. The empirical record shows that over the years countries can indeed use high tax rates and collect the revenues (with little evasion) but only if the rates are not punitive and the taxes are used to provide services valued by taxpayers, as in Denmark, Sweden, and Norway in the late 20th and early 21st century. To illustrate, in the late 1990s, government spending in Sweden was 68% of GDP. Even after Sweden reduced substantially income and wealth taxes after 2004, government spending supported by taxes was still 52% of GDP in 2012. But the quality and coverage of government-provided public services, especially in pre-university education and health care is quite high relative to say, the U.S. The Swedish tax burden (taxes as a percent of GDP) remains high. Clearly taxes are used to provide public services valued by taxpayers, “The eight-year Itch”, The Economist , September 13, 2014. and taxpayers are not reluctant to pay taxes.